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As a small-business owner, you know that your finances are a top priority — and therefore, your bookkeeping processes are too. Although sometimes grouped within business accounting, bookkeeping itself is a core part of managing your finances and ultimately promoting the growth and success of your business.
If you’re new to small-business bookkeeping, however, you might be wondering where to begin: What exactly is bookkeeping for small business? How does it work? What do you need to know about the fundamentals of bookkeeping? This small-business bookkeeping guide is here to answer those questions and more.
Small-business bookkeeping: The basics
Small-business bookkeeping involves all of the processes necessary to ensure that your business has an accurate record of its financial activity.
Traditionally, bookkeeping involved physically recording a business’s day-to-day transactions in a journal or daybook, hence the name “bookkeeping.” However, as technology has developed and many businesses employ the use of spreadsheets, accounting or bookkeeping software, the process has developed as well. Therefore, bookkeeping can encompass a variety of tasks — from basic data entry in a software platform to working with certified public accountants — but at the end of the day, small-business bookkeeping is the backbone of your accounting and financial systems.
What is involved in bookkeeping for small businesses?
With the development of bookkeeping and accounting technology, bookkeeping tasks have become much more automated, but this doesn’t make it any less important to manage them and ensure that everything is operating properly.
Setting up and streamlining accounting software
One of the first tasks involved in bookkeeping for small businesses is setting up and managing your bookkeeping or accounting software.
This will include connecting business bank accounts, any necessary data entry and reconciling transactions. Although some of these tasks may be automated within the software, part of bookkeeping involves checking for errors and ensuring that everything is running smoothly and is completed correctly. In this way, this part of bookkeeping should also include learning as much as possible about your specific software and looking for ways to automate and streamline different parts of your accounting processes.
If you’re working with a bookkeeper and setting up a system for the first time, you may also utilize this individual’s expertise to choose the best platform for your particular business.
Choosing an entry system
Another key part of small-business bookkeeping is determining your entry system, meaning whether you’ll be using single- or double-entry accounting.
Single-entry accounting means that you’ll record all of your transactions once, either as an expense or income. This method is simple and straightforward, suitable for smaller businesses that don’t have significant inventory or equipment involved in their finances.
Double-entry accounting, on the other hand, means that every transaction will be entered twice, in order to “balance the books.” Each transaction, therefore, is entered as both a debit and a credit. Double-entry accounting, although more complicated, is extremely useful and can prevent errors in recording transactions.
The entry system that you use is up to you; however, the decision you make will impact how you manage your finances and how exactly your bookkeeping processes will work.
Choosing an accounting method
Similarly, you’ll also need to decide whether you’ll be using cash- or accrual-based accounting.
Cash-based accounting means that you’ll only record transactions in your system when money changes hands, meaning you won’t record invoices your customers owe you or outstanding bills you owe until the customer actually pays you and you actually pay your bills.
With accrual-based accounting, on the other hand, you’ll record those invoices and bills even if the funds haven’t actually been exchanged. Generally, accrual-based is the recommended accounting method, but just as with your entry method, the decision is ultimately up to you. And once again, the method you decide to use will affect how you perform your bookkeeping tasks and overall manage your finances.
After you’ve made these core decisions regarding your software, entry system and accounting method, your small-business bookkeeping will largely involve managing your transactions on a day-to-day basis.
This means ensuring that transactions are imported properly and accurately, and categorizing them — assets, liabilities, equity, income, expenses — as appropriate. Additionally, your basic bookkeeping will involve reconciling these transactions and making sure they’re recorded according to the entry system and accounting method your business is using.
Handling accounts receivable and payable
In addition to the overall process of managing transactions, bookkeeping for small businesses tends to encompass all of the tasks involved in both accounts receivable and accounts payable.
For accounts receivable, this may mean estimating the eventual value of a finished project, preparing and sending invoices and providing statements — essentially, ensuring your business is paid for your goods or services.
On the other side of the coin, small-business bookkeeping will also entail making sure your business pays its dues — and does so on time. Therefore, your accounts payable will include making accurate, timely payments to your vendors, lenders and landlords, as necessary.
Setting up payroll
Payroll setup and the process involved will differ from business to business — some businesses’ payroll will live within their accounting software; others will have a whole other payroll software.
Depending on your specific business, your bookkeeping may involve setting up your payroll system and coordinating the process with the remainder of your bookkeeping and accounting tasks.
Coordinating with your tax specialist
Whether you’ll be handling your small-business bookkeeping or you’ll be working with a professional, part of the process will be tax-related. You’ll want to identify potential deductions for your business and work with your tax specialist to make your tax procedures as seamless as possible.
The person responsible for your bookkeeping will need to serve as a resource for your tax specialist — whether a CPA or enrolled agent — and be able to communicate and coordinate effectively regarding transactions and other financial information with this professional to complete your business taxes.
Managing financial statements and documents
Finally, a core facet of bookkeeping for small businesses will include managing important accounting documents and maintaining the information — transactions, assets, income, expenses, etc. — that are used for financial statements like the income statement, balance sheet and more.
The individual or service responsible for your bookkeeping will ensure that all of your documents are organized, stored properly and accessible for any other team members or consultants who need to use them.
Moreover, although all of these elements are typically included in small-business bookkeeping, the extent of the process will ultimately depend on your specific organization. At the end of the day, therefore, your bookkeeping boils down to any and all of the processes required to ensure that your finances run smoothly and efficiently.
Bookkeeping vs. accounting: What's the difference?
As you may have noticed through our bookkeeping 101 breakdown of the different elements involved in this overall process, accounting and bookkeeping work hand-in-hand.
Although many people refer to bookkeeping and accounting interchangeably, these two operations are not technically synonymous.
Starting with bookkeepers, these professionals differ from accountants in the following ways:
Bookkeepers typically have on-the-job training experience. Some might seek certification through bookkeeping training programs.
Bookkeepers are intimately acquainted with a variety of business software solutions, enabling them to make recommendations on technology that can be used by clients and their employees, as well as the bookkeeper themselves.
These professionals cannot perform independent audits or attestations.
Bookkeepers usually know the day-to-day details of a client’s business.
Bookkeeping professionals are typically only aware of a client’s business finances.
Generally, bookkeepers don’t file tax returns other than those for payroll and sales taxes.
Accountants, on the other hand, are distinguished in the following ways:
Accountants typically have an accounting degree. Many are certified public accountants, or CPAs, though not all accountants pursue this designation.
Accountants employ accounting solutions for tax planning and other financial insights; clients typically won’t work within these programs.
CPAs and certified auditors can perform audits and attestations and produce certified financial statements.
Accountants usually have a higher-level view of a client’s business in order to extract crucial financial insights.
Often business accountants have insight into a client’s personal finances as well as their business finances.
Accountants tend to file business and personal income tax returns.
Why bookkeeping for small business is important
A common mistake that business owners often make is designating bookkeeping as simply, “data entry,” and hand it off to an employee who has no prior bookkeeping experience. Even though accounting software can make bookkeeping processes much easier than they have been in the past, it’s still essential that your small-business bookkeeping is handled properly.
Why is bookkeeping so significant?
Here are a few of the most notable reasons:
Bookkeeping helps you separate your business and personal finances. Creating this separation is not only crucial to the growth and success of your business but also ensures that you’re not personally held liable for any debts or issues related to your business.
Bookkeeping helps prevent and identify accounting or financial errors. By managing your transactions and reconciliation, you can more easily identify a mistake that’s been made by your bank or through data entry — instead of finding these kinds of mistakes when they’ve already impacted your finances.
Bookkeeping helps you put your business in the best situation to streamline your tax processes, receive the maximum deductions and work efficiently with any tax professionals.
By consistently maintaining your financial data, bookkeeping can give you a sense of your business’s progress and financial health — allowing you to identify ways you might be able to improve or processes you want to change. Overall, your small-business bookkeeping can help you plan and set a path for financial growth.
The organizational element of bookkeeping is particularly important when you’re trying to get a business loan, acquire another business, buy new equipment or take any other significant action with relation to your business. With all of your financial information stored, documented and properly managed, the process of applying for a loan, for example, will be much easier, as you’ll know that your documents are accurate and you’ll quickly be able to find any information you need.
How to manage bookkeeping for small business
Essentially, there are three ways you can manage bookkeeping for your small business:
You can manage your own small-business bookkeeping.
You can use an online bookkeeping service.
You can work with a bookkeeping professional in person.
Let’s break down each of these options further and explain how each may work.
The first option you have to manage your small-business bookkeeping is to take on this responsibility yourself.
If you run a very small business, you may feel that you can manage your bookkeeping simply by using a manual book or spreadsheet. With free accounting software options, like Wave, for example, you’ll be able to save yourself extensive time and effort by using one of these types of platforms.
Nevertheless, if you’re going to manage your own small-business bookkeeping, you’ll want to remember that this will involve significant knowledge: Running a profit and loss statement, creating invoices and setting up payroll are just a few of the hard skills you’ll need to master if you’re doing all of your small-business bookkeeping on your own.
However, if you do decide to utilize bookkeeping or accounting software, then you’ll be able to sidestep some of the more traditional bookkeeping skills, but you’ll still need the tech-based skills to run and streamline your business’s software. Therefore, you’ll want to look carefully at your different bookkeeping software options, test them out and choose the one that you believe will work best for you.
Bookkeeping with an online service
On the other hand, if you don’t want to personally manage your small-business bookkeeping, you can outsource these processes. One of the ways you can do this is by working with an online bookkeeping service, like Bench or Bookkeeper360. The specific bookkeeping tasks involved will vary based on the provider, but overall, these services will handle your business’s bookkeeping processes, taking the burden and responsibility off you.
Of course, you’ll need to pay for an online bookkeeping service, but this option will give you access to professionals who will manage your bookkeeping and will do so remotely. With an online bookkeeping service, you can communicate completely via email or phone and don’t have to worry about bringing someone into your office or traveling to another office for assistance.
Bookkeeping with in-person help
If you want to outsource your bookkeeping but would prefer to work with a professional in person, you have this option as well. You can hire a part-time bookkeeper to work for your business or — if you have the need and funds — you can hire a full-time in-house bookkeeper.
Whether you hire someone part-time or full-time to handle your business’s bookkeeping, working with a professional in person will give you access to their expertise whenever you need it. Additionally, working with this professional in person will allow them to become more familiar with your business’s finances, processes and accounting tools and software.
However, it’s important to remember that even if you outsource your small-business bookkeeping, your bookkeeper will not be the only person working on your finances and, therefore, you’ll want to know what questions to ask them and what to keep an eye out for in your business’s financial processes and documents.
How to find small-business bookkeeping help
If you do want to outsource your small-business bookkeeping — whether with a virtual bookkeeping service or an in-person professional — taking the right steps in your search process is essential.
Networking and referrals
A tried-and-true way to find bookkeeping (or any type) of assistance for your business is to reach out to your network and ask for referrals.
If you already work with a CPA, business lawyer, tax advisor or some other type of business professional, you can ask them if they have recommendations for a bookkeeper or bookkeeping service.
Similarly, you might reach out to other small-business owners or industry associations and ask about bookkeepers or bookkeeping services that they use or have used in the past.
More than likely, someone within your small-business community will have a recommendation and will be able to point you in the right direction for getting the best bookkeeping assistance for your business.
On the other hand, you might prefer to go straight to the internet. You can quickly and easily search for bookkeepers or bookkeeping services online; however, when you do so, you’ll want to take extra care to make sure any individual or service you find is reliable.
Therefore, you might want to start by looking through your accounting software’s directory of bookkeeping professionals that are certified as experts on your given software. You might also consult professional bookkeeping communities, accounting blogs or industry forums, and see if you can find a professional or service for your business in one of these places.
Nevertheless, if do you find a bookkeeper or service by searching online, you’ll want to research their reviews and talk to them directly before making any final decisions.
This article originally appeared on JustBusiness, a subsidiary of NerdWallet.